How do automatic stabilizers differ from discretionary fiscal policy tools?
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Automatic stabilizers differ from discretionary fiscal policy in that automatic stabilizers do not have to be voted by Congress. Automatic stabilizers kick in automatically when certain economic conditions arise. Discretionary fiscal policy is only made if Congress explicitly votes to do so.
A good example of an automatic stabilizer is unemployment insurance. There are certain levels of federal unemployment insurance benefits that are preapproved by Congress. Anyone who meets certain criteria automatically gets those benefits. When the economy slows down and people are put out of work, these benefits work to stabilize things without Congress having to vote.
By contrast, there can also be discretionary fiscal policy such as a “stimulus package.” This sort of package does not come about automatically. There is no provision that says that the government will pay out a certain level of money if economic activity slows. Instead, Congress must draft and pass a bill to specifically lay out what sorts of stimulus spending will occur.
Thus, there is a major difference between these two kinds of government spending. One occurs automatically while the other must be specifically voted by Congress.
When we are looking at economics, particularly micro economics, we are looking at the budgets within the world’s modern governments that use taxes and spending on public welfare to help to monitor fluctuations in inflation or deflation. These stabilize financial cycles within each fiscal year, corporate and personal income taxes are the best automatic stabilizers as you can predict this more accurately from year to year and can be directly influenced by government intervention (they can raise or lower income and corporate taxes).
When we look at discretionary fiscal tools are used to directly affect the economy at a particular point in time instead of across the whole fiscal year. There are no predetermined rules that they must follow instead those within power within the government may make fiscal choices based on their judgment and the information they have. An example of this would be decreasing corporate taxes in order to attempt to increase jobs during a fiscal slump where there is high unemployment.
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